The IFRS-IT Connection

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With international financial reporting standards set to become the new accounting regime in Canada on January 1, 2011, most public companies there are well along in the conversion process. Their experience may prove useful to U.S. companies if and when the latter are required to switch to IFRS. One lesson: while the finance function naturally should drive the conversion project, the high-level participation of information-technology leaders is essential, especially in complex organizations.

In capital-intensive industries such as utilities, telecommunications, and mining, as much as 20% of the overall IFRS conversion effort may be technology related, according to Paul O’Donnell, a partner in Ernst & Young’s IT, risk, and assurance practice in Canada. “IT should have a seat at the table,” he says. “It is very important that there is open and frank communication between the two groups.”

At Hydro One, a major electricity supplier in Ontario, one of the first steps in the conversion project was to establish a tight partnership between accounting and IT, notes Frank D’Andrea, the utility’s director of corporate accounting and reporting. The teams worked together on the diagnosis of gaps between Canadian generally accepted accounting principles and IFRS pertaining to the company’s business. “As you move along, every time you make an accounting decision you want to get IT’s perspective” on what system changes may be required to accommodate it, he says.

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A company has to figure out whether such gaps will be best filled with existing IT systems; low-cost, bolt-on solutions; upgrades to existing systems; or completely different systems. Typically, says O’Donnell, switching to IFRS is not by itself a reason for a complete system change. But if a company has had its existing technology platform for a number of years and added a lot of ad hoc tools as needs arose, an IFRS conversion project may become the proverbial straw that breaks the camel’s back.

IT should provide finance leaders with a cost-benefit analysis that includes a range of options at different price points for closing the gaps between GAAP and IFRS, adds O’Donnell. He advises CFOs to “rein in” the scope of the project, if necessary, so that it doesn’t go beyond what is material to the company’s financial results, running up costs.

D’Andrea recommends ranking the gaps using a matrix of three considerations: the magnitude of the change required, the degree of difference between current GAAP and IFRS, and the amount of time needed to implement a fix. IT projects already in the pipeline should also be ranked; some may need to be deprioritized, given the informational needs that may be required to shift to the new accounting framework.

Indeed, D’Andrea cites identifying new data requirements as a top-priority IT consideration regarding conversion to IFRS. The more principles-based international standards have fewer rules than Canadian (or U.S.) GAAP but compensate for that by requiring significantly more disclosure on events and transactions in the footnotes to financial statements. Thus, systems may need to be retooled to capture and report the new information. If data needs are not addressed early on, D’Andrea says, a company can risk rushing into a short-term solution that will prove unsustainable and therefore, in the end, more costly.

A company’s enterprise resource planning system may need to be modified to handle differences in the way some accounting measurements — for example, asset retirement obligations — are calculated under IFRS. The same goes for processing logic. For example, unlike Canadian and U.S. GAAP, IFRS allows an asset previously written down for impairments to be written back up if its fair value recovers. Processing logic that takes that possibility into account would need to be built into systems.

There may also be a need for changes to the interface between the general-ledger system and any other system that relies on data from the ledger, such as for internal-management reporting or compliance. “If you’re changing the financial-speak of the company, such as with IFRS, of course you’ll need to change your ledger, but you also need to make sure all the systems that interface with it are IFRS-compliant, too,” says D’Andrea.

Finally, internal controls over financial reporting should be reevaluated to make sure they will still be effective upon the migration to IFRS. That’s a key point of concern for public-company CFOs, who along with CEOs must certify the adequacy of the financial controls.

Meanwhile, a weighty IT issue for highly capitalized companies such as Hydro One relates to the accounting for depreciation of property, plant, and equipment. Under current GAAP, a transmission station, say, may be listed as a single fixed asset with a single useful lifespan. But under IFRS, the station’s components are separated: the original cost is allocated among the buildings, transformers, switches, breakers, and other components, each of which has a different useful life.

Systems thus need to be sufficiently robust to account for the various components. An additional level of complexity springs from the fact that Canadian companies are accounting in both GAAP and IFRS this year (they must present one year’s worth of historical comparative statements with their first IFRS filing in 2011). Some have had to make system changes enabling two sets of fixed-asset subledgers to be run. The largest ERP systems typically support that functionality, but with some systems it’s more difficult to manage, O’Donnell notes.